Published on 16/03/2017 2:32:08 PM | Source: Kotak Securities Ltd

Sell Havells India Ltd For Target Rs.418.00 - Kotak Sec

Posted in Broking Firm Views - Long Term Report | #Kotak Securities Ltd #Power Sector #Broking Firm Views Report #Havells India Ltd


HIL stock has appreciated sharply since our previous update (post Q3FY17 results). We believe that at current valuations (at PER 33.4x FY18 earnings) company's stock is trading expensive vis-à-vis and outperformance over the broader market is unlikely to last.

Havells board has recently approved the acquisition of Lloyd consumer durable business for an EV of Rs 16 Bn on debt/cash free basis. The acquisition would provide Havells entry into the consumer durable market (mainly white goods).

We view this development as a long term positive for the company. We include financials of Lloyd consumer in our estimates; value HIL stock at PER of 33x FY18 earnings; move recommendation to 'Sell' from 'Accumulate' earlier with revised target price of Rs 418 (Rs 400 earlier).

 

Company Highlights

HIL stock has appreciated sharply since our previous update (post Q3FY17 results). We believe that at current valuations (at PER 33.4x FY18 earnings) company's stock is trading expensive vis-à-vis and outperformance over the broader market is unlikely to last.

 

Havells India board has approves acquisition of Lloyd consumer durable business last month

* Havells, in Feb 2017 announced that the company's board has approved the acquisition of Lloyd Consumer Durable Business Division (Lloyd Consumer). The acquisition, shall mark Havells' foray into Consumer durables industry.

* Havells has signed an agreement with Lloyd Electrical and Engineering Limited and Fedders Lloyd Corporation Limited for acquiring Lloyd brand and the consumer durable business.

* Lloyd consumer durable division is engaged in sourcing, assembling, marketing and distribution of consumer durables including air conditioners, TVs, washing machines and other household appliances, mainly white goods.

* Havells reported that the 9MFY17 revenues (proforma) of consumer business of Lloyd stood at Rs 12.4 Bn and EBITDA at Rs 750 mn. Further, Havells added that based on the current run rate, it expects Lloyd to report FY17 revenues and EBITDA at Rs 18.5 Bn and Rs 1.1 Bn respectively.

* The acquisition is proposed to be executed at an enterprise value of Rs 16 Bn ona debt free, cash free basis. We believe that the proposed valuation at 14.5x EV/EBITDA FY17 earnings (proforma) is reasonable, given Lloyds lower margin profile vis-à-vis key competitors. We note that Voltas and Blue Star enjoys higher operating margin of over 11% in the unitary cooling business (comparable with Lloyd Consumer business). We believe that the acquisition of Lloyd consumer business would open new avenues for growth and would be a long term positive for Havells India.

 

Revenues to grow on back of strong demand in consumer business; shift from CFL to LED would continue to impact lighting divisionWe project revenues to grow by c.12% YoY (ex-Lloyd consumer; estimate Lloyd revenues at Rs 20.7 Bn) in FY18 on back of domestic switchgears, cables and consumer appliances segment. Pickup in demand in low cost housing would auger well for company's switchgear division. We believe that the long term drivers in the domestic business including 1) growing disposable income with Indian households 2) evolving lifestyle patterns in India leading to shift in preference for premium products, remain intact.

In lighting division, we expect growth led by LED segment and CFL (13% of current lighting portfolio) is expected to further contract in FY18. In our projected financials we build 12.5% EBITDA margins in FY18E. We believe that the higher volumes in consumer electric business would support margin, however higher promotion and personnel expenses in the Lloyd business would have a negating impact on the margins. We note that Lloyd operating margins are substantially lower than the peer group currently. We also account for increasing input prices trend in our estimates.

 

Valuation and Recommendation

HIL stock has appreciated sharply since our previous update (post Q3FY17 results). We believe that at current valuations (at PER 33.4x FY18 earnings) company's stock is trading expensive vis-à-vis and outperformance over the broader market is unlikely to last.

We include financials of Lloyd consumer in our estimates; value HIL stock at PER of 33x FY18 earnings; move recommendation to 'SELL' from 'Accumulate' earlier with revised target price of Rs 418 (Rs 400 earlier).

 

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